Indian Economy - A Profile

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Common Proficiency Test (CPT)
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ECONOMICS

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Chapter 5: Indian Economy-A Profile

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Praveen Balduas Smart Notes ECONOMICS CACPT
Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 1

CHAPTER 5 UNIT 1
NATURE OF INDIAN ECONOMY

1.0.0] FEATURES OF UNDERDEVELOPED ECONOMY:
GENERAL POINTS INDIAS CASE
1 Agriculture is main occupation of
the people.
At present nearly 52% population is dependent on agriculture.
2 Poverty is wide spread.

Poverty is very high.
Every 3
rd
poor person in the world is an Indian
1/3 of worlds poor people live in India.
Nearly 22%population is below poverty line.
3 Low capital formation Gross domestic saving 37.7%
Gross capital formation is 39.1%
4 High rate of population growth

India is facing population explosion
Population is growing at a rate of more than 2% p.a
5 High dependency rate [Non
working age group]
40% of the population depends on working population. [Age
below 15& above 64]
6 Low standard of living

Low per capita income i.e. 950$ thus low standard of living.
It is low as compared to DEVELOPED COUNTRIES like USA, UK,
GERMANY & DEVELOPING COUNTRIES like CHINA, SRILANKA,
INDONESIA.
7 Unemployment or
Underemployment
In India there is high rate of open unemployment & disguised
unemployment.
8 Human well being in terms of
a) Longevity (Life expectancy)
b) Knowledge (Education)
c) Standard of living (Per capita
income)
i) Human well being is measured by HUMAN DEVELOPMENT
INDEX (HDI) developed by UNITED NATIONS DEVELOPMENT
PROGRAMME (UNDP)
ii) India is ranking 132 out of 179countries as per HDI.
9 Income or wealth inequalities Inequities in a country are measured by GINI INDEX in terms of
coefficient between 0 &1.
0 represents PERFECT EQUILITY
1 represent PERFECT INEQUALITY
Gini Index for India is 0.368 in 2004.
Thus over a period Inequality is increasing.
NOTE: From the above facts we can conclude that India is underdeveloped country but we can also say
India is a developing country because it is moving in the path of development.

1.1] WHY SHOULD INDIA CALLED DEVELOPING ECONOMY?
REASON FACTS ABOUT INDIAN ECONOMY
1 Rise in National Income From last 5 & decade [56 Years], the National income [NNP]
has increased by more then 12 times.
2

Rise in pen capital [PI]
Income.
From last 5 & decade [56 years] the pen capital income [PCI]
has increase by more than 3 times.

3 Significant charges in
occupational distribution of
population
Occupation / Employment
Year Primary
Sector
Secondary
Sector
Tertiary
Sector
1951
2001
72.1%
59.3%
10.6%
18.2%
17.3%
22.5%
2007-2008 52.7% 18.8% 28.5%
4 Charges in sectoral
distribution of Domestic
product [GDP]
SHARE IN GDP
Primary Secondary Tertiary
1950-1951 56.1% 11.7% 32.7%
2007-2008 17.0% 25.8% 57.2%
5 Growing Basics Industries SECOND FIVE YEAR PLAN gave priority to develop Basic
Industries.

6 Improvement in other
Infrastructure.
RAILWAY: Indian Railway has been WORLDS 3
RD

LARGEST rail network under a SINGLE MANAGEMENT.
ROADWAYS: India Road network is the ONE OF THE
LARGEST NETWORK in the world.

7 Medicine & Health Number of DOCTORS increased by more than 9 TIMES
Bed Population ratio is now 1.03 per 1000 population.
8 Education Facilities Primary education institution has been DOUBLED
Higher secondary education institute has increased by 20 TIMES
Number of colleage has increased by around 30 TIMES
Literacy ratio is 67.6 % in 2005-2006


CHAPTER 5 UNIT 2
ROLE OF DIFFERENT SECTORS IN INDIA

2.0] AGRICULTURE
Agriculture is very important sector of Indian economy due to following points.

2.0.0] ROLE OF AGRICULTURE IN INDIA:
POINTS EXPLANATION
1 Providing employment At present nearly 52% populations working in agriculture sector.
2 Share in NI Agriculture share in total GDP has come down from 55% in 195051 to 17%
in 0809
3 Supporting industries The prosperity of agro based industries. (Textile, Sugar, Tea, Paper)
Handloom, Cottage industries depends on agriculture prosperity.
4 Shares in foreign trade The main exporting agricultural products are Jute, Tea, Tobacco, Coffee,
Textiles, Cashew, and Vegetable oil etc.
In 200506 the share of agriculture exports in total exports is 12.2%.
In 200708 the share of Agricultural Imports in total imports is 3.1%
5 Supply of food & fodder Agriculture provide food to people & fodder to Cattle, Buffaloes, Sheep,
Poultry etc
The cost of living also gets affected by agriculture prosperity.
6 Savings of capital Agriculture has low capital ratio as compare to Industries sector.

2.0.1] GROWTH OF AGRICULTURE DURING PLANNING PERIOD:
POINTS EXPLANATION
1A Increase in Production Agriculture production has increased but reduced by more than thrice to
million tones in 200809
HYVP / GREEN REVOLUTION / WHEAT REVOLUTION:
a) This Programme was stated in 1966
b) Proper irrigation facilities.
c) Use of fertilizer, pesticides, insecticides
d) HYVP was restricted to 5 crops i.e. Wheat, Rice, Bajra, Jowar & Maize.
BUT Out of all there wheat has in creased shortly.

1B Increase in productivity Agricultural productivity is measured in terms of yield per hectare of land.
Productivity of land increased more in case of Wheat & Potato was
compare to other commodities
2 Diversified Agriculture The share of Non crop sector (Fishery, Forestry, Animal husbandry) is
increasing in total agriculture out put.
Area under commercial crop like Sugar, cotton, oilseeds etc are increasing
3 Modern Agriculture Farmer are adopting modern techniques of intensive cultivation, multiple
cropping & scientific water mgmt & machines for productions.
4 Improved agrarian system Before Independence.
There were three types of land tenure systems i.e. Zamindari System,
Royatwari system & Mahalwari system.
There intermediaries exploits tenant (actual filler) by charging more than
25% of the produce in the form of rent.

BUT
After Independence
Land reforms were introduced with following three objectives.
1) Abolition of Intermediaries. 173 intermediaries & 2 crores tenants
were brought in direct contact.
2) Tenancy Reforms
a) Regulations of rent Rent were fixed between 2550% for
different states.
b) b) Security of tenure The tenants cannot be ejected except
in accordance with provision of low.
c) c) Conferment of ownership rights on tenants Limit were
imposed on the amount of land which a family could hold
i.e. a family could hold 18 acres of wet land or 54 acres of
un irrigated land.
3) Reorganization of agriculture. Under this Programme it was decided
to give to farmer one consolidated land equal to total different
scattered plots of land.
5 Other development Farmers get inputs & Loans at subsidized rates.
Minimum age level was fixed for agriculture labourers.
National food security mission (NFSM) has implemented to have self
sufficiency in food crop like rice, Wheat & Pulses.

2.0.2] PROBLEMS OF AGRICULTURE SECTOR IN INDIA:
POINTS EXPLANATION
1 Slow & Uneven growth. The growth of agriculture sector is not sufficient to meet the rising demand
of population growth.
Crops like Wheat are growing at a higher rate as compare to crops like
Maize, Jowar etc.
Regional imbalance i.e. Growth confirmed to areas like Punjab, Haryana,
Western Uttar Pradesh.
Low yield per Hector:
India accounted for 21.8% of global rice production but its yield per
production but its yield per hector is 1/3 of Egypt.
India accounted for 12% of global wheat production but its yield per
hector is less than 1/3 of UK.

2 Not so modern agriculture The HYVP was covered only 44% of gross cropped area
Only 40% of gross cropped area has irrigation facilities.
About 60% of the area is rain fed.
Today also old methods of ploughing, sowing & harvesting etc were used.

3 Problem relating to
finance
In 1969: 14 banks were nationalized.
In 1975: Regional rural banks (RRBs) were established to provide loans to
small, marginal farmers & Artisans in rural areas.
In 1982: 6 more banks were national sed.
In 1982: An apex bank NABARD was setup to provide agricultural loan (In
1963 ARDC was setup but it has been taken over by NABARD)
Due to the above development the money lender share in total rural

credits were reduced from 71.6% (1951) to 17% at present.
In 1998: Kisan credit card scheme was started & more than 800 lakhs
credit card has been issued to meet their cultivation needs.
In 2004: Farm Credit package was introduced under the credit flow has
more than tripled till 200809.
In 200809: Government announced Agriculture Debt Waiver & Debt
relief scheme under which overdue loan worth Rs.50000 crores were
waived & for loan worth Rs. 10000 crores one time settlement relief was
provided to small, marginal & other farmers.
4 Problem relating to ware
housing marketing
The storage facilities are very poor, then as a result 10-15% of agriculture
products get spoiled or eater by rats.
Farmer does not get fair price from purchasers agents charge heavy
commission from the farmer for selling of their products, Farmer are not
well informed about market situations
Despite the Government runs larger network of despite the Ration card, The
total requirements of food grains of all vulnerable sectors are not met.
To develop marketing infrastructure , Storage , Ware housing, Cold chairs
etc some step have recently taken i.e.
Agricultural produce market committee (APMC) act has been amended to
improve Agriculture marketing.
Agri clinic & Agri business centre (ACABC) & Kisan call centers &
Kisan knowledge mgmt system (KKMS) to transfer agricultural
technologies & information to farmers.
National policy for farmers 2007 is adopted to develop various facilities
& Agricultural Infrastructure

TARGET OF 11
TH
FIVE YEAR PLAN:
The Plan target is to Double the growth rate in agriculture from less than 2% (achieved in 10
th
plan) to
4% in the 11
th
plan (for which second green revolution is urgently needed).


2.1] INDUSTRY
It has been noticed that, Countries which as industrially developed have higher per capita income as
compare to countries which are less industrially developed. But Petroleum exporting countries are
exception.

2.1.0] ROLE OF INDUSTRY IN INDIA:
POINTS EXPLANATION
1 Providing Employment At present industries engaged only 18% of labour force of India.
2 Share in GDP Industrial sectors share in total GDP was 25.8% in 200708.
3 Contribution to exports Industry contributes around 2/3 of total exports
4 Enhancing further the
economic growth
Industry helps an economy to attain self sustaining growth.

5 Strengthing the economy Industry helps Strengthing economy by:
a) Producing capital & Consumer goods.
b) Developing infrastructure like Railways, Dams etc.
c) Mordenising agricultural through various modern machines &
Equipment (Tractors etc)
d) Making self reliant in defiance materials.

2.1.1] GROWTH OF INDUSTRIAL SECTOR IN INDIA:
POINTS EXPLANATION
1 On the basis of size Large industries
Medium industries
Small industries.

2 On the basis of END USE Basic goods industries Minerals, Fertilizers,
Cement, Iron & Steel, Electricity etc.
Capital goods industries Machinery, Railroad
equipment etc.
Intermediate goods industries Chemical, Rubber,
Plastics, Coal, Petroleum products etc
Consumer goods industries Watches, cosmetics,
Perfumes etc.

3 The industrial production has grown at an average rate of 6.2%p.a.

2.1.2] PATTERN OF INDUSTRIAL DEVELOPMENT:

1) Industries development is Lopsided.
2) Consumer goods Industries are well established as compare to capital goods industries.
3) Industrial development in
1951-1965: Steady growth of 8%
1965-1980: Growth rate fell down to 4.1% due to Declaration & Retrogression. The reason of
Declaration & Retrogression. Are:
a) Unsatisfactory performance of agriculture.
b) Slackening of real investment in public sector.
c) Slow down in import substitution.
d) Regulation & control over private sector.

e) Narrow market for industrial goods in rural areas.
Tenth plan (20022007) In this planning period the target to achieve industrial growth rate was 10%
but actually achieved was 8.7% (In 200607 th growth rate was 11.5%)
Eleventh plan (200712) In this planning period the target to achieve industrial growth rate is 8.5% p.a.
4) The Programme of industrial was started in second five year plan based on Mahalanobis model.
Mahalanobis model plan emphasized on building basic & Capital good industries
Three steel plants were setup in the public sector at Bhilai, Rouakela, and Durgapur
5) In pre reform period[before 1991]the importance was given to develop basic & capital goods industries
BUT
In post reform period (since 1991) the importance was given to Intermediate & Consumer goods
industries.
6) The increase in no. of public sectors units can be explained with the help of following chart.
Period No of public sector Investment
1951 5 30 crores
2008 242 455000 crores
Out of 242 (CPSEs) 160 are making profit & 53 are making losses.
7) The increase in no of private sectors units can be explained with the help of following charts.
Period No of private sector Investment
1951 2 (Tata & Birla) -------------
At present 80 1000000 crores
8) The industrial finance was supported heavily by Public financial institutions like LIC, IDBI, ICICI, and
Commercial Banks.
9) India ranks high in the works in respect of technological talent & manpower & in development of
Information & Communication technology, Space research, Nuclear technology, Electronics etc.
10) Definition or investment limits in Micro, Small & Medium enterprises in Manufactory ad well as service
sector.
Type of Enterprises Investment limit in MFG Investment limit in service sector
Micro enterprises Up to 25 lakhs Up to 10 lakhs
Small enterprises 25 lakhs 5 crores 10 lakhs 2 crores
Medium enterprises 5 crores 10 crores 2 crores 5 crores
Large enterprises More them 10 crores 5crores & Above

11) The total number of Registered & Unregistered units in India is 128.4 lakhs in 0607.
12) DEVELOPMENT OF SMALL SCALE INDUSTRIES & COTTAGE INDUSTRIES AS COMPARE TO LARGE SCALE
INDUSTRIES ARE AS FOLLOWS:
POINTS EXPLANATION
1 Growth Rate The growth rate of SSI is 10%.
SSI contributes around 39% of the total manufacturing output.
2 Employment The SSI employed 312 lakhs person in 0607.
SSI employees 60% of total industrial employment.
Employment in the SSI & CI is next only that of agriculture
sector.
3 Exports SSI contributes 40% of total manufacturing exports.
It contributes 33% of total exports in the country.
4 Employment generating capacity
per unit of Capital
EGC per unit of capital is 8 times more than large scale
industries.
5 Output generating capacity per
unit
OGC per unit of capital is 3 times more than large scale
industries.

2.1.3] PROBLEMS OF INDUSTRIAL DEVELOPMENT IN INDIA:
POINTS EXPLANATION
1 Under utilization of resources Under utilization of resources (Production capacity) varies from 20%
60% but Average underutilization of resources if 40%50%.
2 Inadequate employment
generation
The labour intensive manufacturing sectors (Leather, Food Product,
and Jute) failed to generate employment in recent years.
3 Regional imbalances Large scale industries are majorly setup in Maharashtra, WB, Tamil
nadu & Gujarat.
In the above state 44% of total factories are setup & 48% of total
productive capital is invested.
Bihar, UP, Punjab, AP, Karnataka, MP, Rajasthan, is still industrially
backward states.
4 Industrial sickness There are total 1.18 lakhs sick units (Large & Small) out of which 96%
is small scale sick units.
Sickness arte identified as financial mismanagement, demand
recession, labour unrest, out dated technology etc.

2.2] SEVICE SECTOR
{2.2.0, 2.2.1, &2.2.2}
POINTS
{2.2.0 & 2.2.1} Role & Growth of
service sector in India
{2.2.2} Related problems in service sector
1)Increasing share in
GDP & Growth of
service sec
In 200708 its share in the GDP
was 57% (more than a half)
In India MFG sector has failed to
grow substantially & service
sector has by passed the
secondary sector.
The Avg. growth rate in 10
th
plan
was 9% p.a. & 11
th
plan aim the
growth rate of 9.4% p.a.
Income elasticity of demand for
service is greater then 1.
Some economist says that service sector
growth must be supported by
proportionate growth of industrial
sector; otherwise service sector growth
will not be sustainable.
Because service sector cannot grow in
Isolation.
2)Providing
Employment
In 2001 around 22.5% of working
population was engaged in service
sector.
Service sector provide less than 25% of
total employment, Which is
comparatively very less at compare to
growth i.e. more than 50%
3)Contribution to
exports
Service sector accounts 45% of
total exports in India(200708)
India ranked 9
th
in the list of
exporters of commercial services.
Indias share in worlds total
commercial service was 2.7% in
2006.
Indias service exports recovered
a growth of around 22% in 2007
08.
Service trade face various problems like
lack of export promotion councils, Visa
restrictions, Preferential market access
etc.

Service exports increased 4 fold &
reached US$90 billions in 2007
08.
4)Growth of subsectors of service
A] Transport, Storage &
Communication.

It is the fastest growing sub sector
the average growth rate is 15.3%
p.a. in 10
th
plan.
Infrastructure is inaugurated in rural as
well as urban area for e.g.: Bangalore,
The silicon city of India faces power
shortages, Traffic congestions etc.
B]Tourism (Trade,
Hotels & Restaurant)

India being a sun continent with
varied geographical, climatic,
ethnic, cultural, religious, social
conditions attracts tourists.
Trade, Hotels & Restaurants
recorded a growth of 10% in 07
08 but in 0809 growth reduced to
9%
Foreign tourists often get cheated &
harassed.
Indian service providers are not trained
in public dealing, etiquettes, Hospitality
& Manners.
Our consular division is also not proper.

C] Financial, Insurance,
Real estate & Business
services.

This segment is growing very fast
& is in the form of Transition.
This sector is undergoing liberal
reform process i.e. cutting of
barriers & allowing entry to
foreign companies.
These sectors recorded a growth
of 11.7% in 0708 & 7.8% in 0809

D] Health service

Indian medicine systems like
Ayurveda, Unani & Nature care
attract patients from across the
world

E] It enabled service
(BPO & KPO)
India has second largest scientific
& technical manpower in the
world
Western companies seeing India
as their Top destination for
outsourcing.
Indias BPO & KPOS are facing stiff
competition from other countries.


CHAPTER 5 UNIT 3
NATIONAL INCOME OF INDIA
INTRODUCTION
National income or National product is the Money value of all the final goods & Services produced by a
country during a period of One year.
The value of all goods & services produced is measured in Money.
National income is always estimated
NI helps government to analyse level of production, Economic welfare, Stability & Growth of the economy.
3.0] BASIC CONCEPTS IN NATIONAL INCOME:
POINTS EXPLANATION
1 Gross Domestic product
(GDP)
It means goods & services are produced in the Domestic territory of a
country in one years.
Domestic territory means:
a) Territory lying within the political frontiers, including territorial waters
of the country.
b) Ships & Airports operated by the residents of the country between two
or more countries.
c) Fishing vessels, Oil & Natural gas rigs & Floating platforms operated by
the residents of the country in International waters or engaged in
extraction in areas in which country has exclusive rights of
exploitation.
d) Embassies, Consulates & Military establishment of the country located
abroad.
2 GDP at current price & at
constant price
Current Price
It means Domestic product is estimated at current years prevailing
prices.
Constant price
It means Domestic product is estimated at past years price taking
as a base year.
GDP calculated at constant price is also called Real GDP.
3 GDP at factor cost & at
market price
Factor cost (FC)
Factor cost includes the sum of domestic factors incomes &
Consumption of fixed capital (i.e. Coat paid to land, labour, capital
& Entrepreneur)
Market Price (MP)
Market price is a price paid by the consumers.
It means it includes factors cost & Indirect tax (IT) & excluded
subsidies (S).
GDP
FC
= GDP
MP
IT + S
4 Net Domestic product
(NDP)
When depreciation allowance is subtracted from gross domestic product
we get NDP
NDP= GDP Depreciation
5 Gross national product
(GNP)
It includes both GDP & Net factor income from abroad (NFIA)
NFIA= The difference between Income received from abroad for rendering
factor service Income paid to factor services rendered by Non residents in
Domestic territory.

NFIA can be Zero, Negative or Positive.
o GNP = GDP + NFIA
6 Net National Product
(NNP)
It can be derived by subtracting depreciation from GP
NFIA is:
Positive (NNP > NDP)
Negative (NDP > NNP)
Zero (NNP = NDP)
7 NNP
FC
or National Income NNP
FC
or FID + NFIA

3.1] METHODS OF MEASURING NATIONAL INCOME:
1. VALUE ADDED METHOD (PRODUCTION METHOD)
In this method Net product or Value added is calculated by subtracting raw material (Intermediate
Goods/ Services) & Depreciation from Gross out put to calculate National Income.
i.e. Net Product = Gross output (Raw material + Dep)
Care should be taken to include the value of following items:
a) Own account production of fixed assets by government, enterprises & household.
b) Production for self consumption.
c) Imputed rent of owner.
d) Brokerage & Commission earned by the dealer of second land Goods / Machines.
Care should be taken to exclude the value of following items:
a) Non Monetary activities i.e. service of mother / House wifes /Friends etc.
b) The value of raw material or Intermediate goods & Service.
Net factor Income from abroad (NFIA) should always be added to net product for calculate NI.

2. INCOME METHOD
In this method only factor incomes of all the factors of production are added to calculate National
Income.
i.e. Factors = Labours Land Capital Entrepreneur

NI = wages + Rent + Interest + Profit.

Care should be taken to include following items:
a) Income of Primary factors
Labour Income: Wages, Salaries, Bonus, Commission, and Employers Contribution to Provident
fund.etc.
Non labour Income: Dividends, Undistributed profits before tax, Interest, rent, royalties, Profit
of govt. enterprise
b) Mixed Income:
It includes all those income which are difficult to separate labour income from capital income
because in many instances people provide both labour & capital service.
Incase of self employed people (Lawyer, Engineers, Traders, and Proprietors etc), Agriculture,
Trade, Transport etc mixed income prevails.
Care should be taken to exclude following items:
a) Transfer income (Pension of retired worker)
b) Illegal incomes, Wind full income, Death duties, Gift tax etc.
c) Sale proceeds of second hand goods
When to add NFIA?

If National income is calculated from data regarding Income paid out by Producer: NFIA should not
be added.
If National income is calculated from data regarding Income received by people: NFIA should be
added.

3. EXPENDITURE METHOD
In this method, only expenditure on final goods & Service produced in a current year & Net foreign
investment are included to calculate NI.
NI = Exp on final goods & Service + Net foreign Investment
Care should be taken to Include following items:
a. Net foreign Investment = Difference between expenditure on foreign financial asset by resident
& expenditure on countrys financial asset by nonresidents.
b. Good & Service produced in the current year only.
Care should be taken to Exclude following items.
a) Goods & Services produced in last year.
b) Raw material & Intermediate goods & Services.
c) Govt. expenditure on pensions, scholarships, Unemployment allowance etc.

Expenditure on Goods & Services.

Consumption Expenditure Investment Expenditure

House hold Govt.
casumption.exp consumption exp.

Business Sector Govt. Sector

FORMULAS
1) Net domestic expenditure (NDE) = Consumption Exp + Net Domestic Investment
2) National Expenditure (NNE) = NDE + Net foreign Investment.
3) Gross National Expditeur = NNE = Replacement EXP.
4) National Investment = Total domestic investment + Net foreign investment.

IMP POINTS
All the three methods should ideally lead to same figure of National income.
India (& other under developed countries) is unable to estimate their National income wholly by one
method i.e.
a) In Agriculture sector Net value added method is used to calculate NI.
b) In small scale sector & Service sector Income method is used to calculate NI.
c) In construction sector Expenditure method s used to calculate NI.
Income method is most suitable method for Developed countries where people properly file their
Income tax returns.

3.2] TRENDS IN INDIAS NATIONAL INCOME GROWTH AND STRUCTURE:
1 Trend in NNP
The real National Income of India has increased at an annual average rate of 4.4% p.a. during 58
year of economic planning.
Economic growth in India since Independence:
During 195080, 3.5% growth rate.
Came to be recognized Hindu growth rate.
During 195080, 3.5% growth rate came to be recognized Hindu growth rate.
Economic growth decelerated in 200809 to 6.7%
India now ranks among the top 10 fastest growing countries in the world along with China,
Vietnam, South Korea, Malaysia, Thailand, Singapore etc.
In tenth plan the achieved rate is 7.6% p.a.
Eleventh plan keeps a target of 8.5% p.a.

2 Trends in per capita Income.
The per capital income of India has increased at an annual average rate of 2.3%p.a. during 58 years
of economic planning.
The capital growth in India since Independence
During 1950-80 1.4% p.a.
During 1980-04 3.6%p.a


CHAPTER 5 UNIT 4
BASIC UNDERSTANDING OF TAX SYSTEM IN INDIA

TAX STRUCTURE IN INDIA

DIRECT TAX INDIRECT TAX

Income tax Wealth tax Gift tax Custom duty Excise duty VAT Service
(Capital) tax

Import duty Export duty

Personal income Corporation Tax
Tax

DIRECT TAX
It is a TAX WHICH CANNOT BE SHIFTED. i.e. the incidence of which falls on persons who pay
them to the government.
Direct tax is PROGRESSIVE in nature.

A] INCOME TAX
It is tax on Income of on Individual or Entity (Business)
Income tax in India was introduced in 1860 & it was discontinued in 1873 & again reintroduce in
1886.
PERSONAL INCOME TAX CORPORATE TAX
It is a tax changed on income of individual, Hindu
undivided family, unregistered firms & Others
associations of people.
Rebates & Deductions are allowed on account of
life insurance, Medical Insurance, Public
Provident fun (PPF) etc.
Tax is charged on the basis of slab rate & the
highest slab is (at present) 30% tax
It is a tax charged on income of registered
companies & Corporations.

Rebate, Tax Exemptions, Tax holidays are allowed
to exporting companies i.e. Export houses.

Tax is changed at a FLATE RATE.
Tax rate are different for Indian companies &
Foreign Companies.

B] WEALTH TAX OR CAPITAL TAX
It is a tax on Assets like Residential houses, Farm Houses, Urban Land, Jewellery, Bullion motor car etc.
Wealth tax was introduced in 1957.
Tax on Agricultural land & Provident Funds in Exempt.

C] GIFT TAX
Gift tax was livable on all donations, Gift to wife etc.
Gift tax was introduced in 1958 & was abolished in 1998 & again reintroduced in April 2005.

Gift received from any person, if the aggregate value exceeds Rs. 50000/, have been made taxable
under Income From Other Source

INDIRECT TAX
It is a Tax which can be shifted through a change in prince.
Indirect taxes are Differential in nature.
The Burden of indirect tax is shifted on consumer (End users)

A] CUSTOM DUTIES
Custom duties are levied on Exports & Imports.
Before tax reforms period India was one of the highest custom duties charger in the world.
At present the maximum rate of custom duty is 10%.
Import duty is changed in two ways i.e.
a) Advalorem basis: It means as a percentage of the price of commodities.
b) Specific import duties: It is changed on Per unit basis.

B] EXCISE DUTY
Excise duty is changed on Production of goods which results in the problem of Cascading of taxes.
Thus to remove the cascading problem excise duty was replaced by Modified value added tax
(MODVAT) in 198687.
MODVAT is changed on the value difference between sales & Purchase items.
But due to some other problems, Further MODVAT also replaced by Central value added tax (CENVAT)
in 200001 with a single excise duty (Tax rate) of 8%.

C] SALES TAX
Sales tax is changed on business transaction i.e. on sales value.
Sales s changed more on Luxurious item & Less or nil on necessities goods.
Sales tax suffers from many problem like Cascading effect, lack of Transparency, Narrow base,
Different procedure followed in different state etc.
Only registered traders pay sales tax to Government.
Sales tax is of two types:
a. State Sales Tax Tax on transaction within state.
b. Centre sales Tax Tax on Inter state sales
At present it is 2%
It is non rebatable tax

D] Value Added Tax
VAT was introduced in 1999 but implemented in April 2005 in Some state (Not all the States in country)
Value added tax is a multi stage tax
Tax credits (set off) are given to businessman.
It is Noncascading.
Sales tax is replaced by VAT.
VAT is exempt on Exports.
VAT is changed on value addition of goods.
At present 33 states / Union territories have implemented VAT.
Those states/Union territories have implemented VAT, registered a growth of 20% p.a.

E] SERVICE TAX
Service tax is changed on specified services

Service tax was introduced in 199495.
Service tax covers more than 100 services (i.e. 108 services).
At present service tax rate is 10%

4.2.2] FEATURES OF TAX STRUCTURE IN INDIA
1) Tax is most important source of revenue of government.
2) At present Tax revenue forms about 20% of National income in India.
3) Among the third world countries, India is one of the highest taxed countries.
4) The Indian government for tax revenue is highly dependent on Indirect tax i.e. 40:60 (40% & 60%
respectively in total tax revenue) It is an unjust ratio.
5) Only 2.5% of the total population pays Income tax in India. (It is a Narrow tax base)
6) Charges in structure of Taxes:
a. For central govt. (union) earlier Income tax & corporate tax were important source of revenue
but at present excise duties are important (But again the trend is reversed)
b. For state government earlier land revenue was important source of revenue but at present
Sales Tax is important.
7) Union Excise duty is one of the largest source of tax revenue for government.
8) Agricultural Income is wholly exempt from the Income Tax.
9) The incomeTax structure is highly complicated & Illogical.
.
4.2.3] EVALUATION OF INDIAN TAX SYSTEM
1) At present the share of direct tax revenue in GNP is 6.5%
2) Indian tax system largely depends on Urban income (areas) & not on rural areas.
3) The revenue from direct tax is Income elastic. BUT The revenue from Indirect Tax is Income Inelastic.
4) The Booth lingam committee & Chelliah committee recommended simplifying the tax system.
5) The cost of tax collection is rapidly increased to 3700 crores in 200708 but cost of tax collection is
lowest in the world i.e. 60paise per 100 rs collection.
6) The black money in India is generated at a rate of 50% of GDP.
7) Evasion of tax & Avoidance of tax in India is very high.
8) Indian tax system
a. Discourage employment.
b. Distorting prices.
c. Adversely affecting savings.
9) Service tax contributes just 10.4% towards tax revenue & 1.2% towards GDP.

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